The fraud triangle and banking swindles

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Tom Ravlic, author  of
Tom Ravlic, author of

An extract from Vulture City: How our bankers got rich on swindles by Banking Day contributor Tom Ravlic.

There is a question that is asked by people whenever they are confronted by acts that are horrid, unexpected or unconscionable. It is the most common and simplest question in the world: why?

Why have the largest companies in the country that purportedly look after the finances of many tens of thousands of individuals turned into entities that appear to be organisations in which financial advisers and other employees have commissions fed into them by intravenous drip?

How did the culture of the Commonwealth Bank’s financial planning arm in New South Wales, for example, turn south during the late 2000s and become one where fleecing customers became a sign of success and not one of complete and depraved moral collapse?

These situations always have some element of pursuit of self-interest about them but this does not offer an explanation of why the entire system was compromised during that period.

The Commonwealth Bank whistle blower, Jeff Morris, explained the cultural decay within the financial planning arm in evidence to a Senate committee hearing into the effectiveness of ASIC, Australia’s corporate regulator.

The culture within the financial planning arm of the bank was driven by the rewards system. Some people within the bank sought to use the incentive-based payments structure of banks to their own advantage with some of the behaviour exhibited by advisers, tellers, brokers and bankers fitting precisely within the definition of what criminologists call ‘the fraud triangle’.

The three factors considered in the ‘fraud triangle’ are the existence of pressure or incentive to commit fraud, the opportunity within the workplace to commit a fraudulent act and also the ability to rationalise the acts in some form. It is clear from evidence outlined by Morris in his materials and in case studies aired during the Hayne exercise that the incentives and opportunities were there in abundance for those wishing to misbehave to do so.
 
Opportunities that may not have existed had proper internal audit and quality review processes been conscientiously maintained, followed and the findings appropriately acted on by those same financial institutions now paying tens of millions in remediation payments to customers exploited by their agents, branch managers or other staff.

Much of this behaviour that resulted in customers’ accounts being bled dry at the CBA and elsewhere was occurring while political leaders were praising the robustness of our banks during the worst of the global financial crisis. It is an open question as to whether this assessment of Australia dodging the bullet during the global financial crisis ought to be tempered by further reflection on the behaviour of those individuals driven by an objective of self-enrichment that was enabled by incentives set for them by their masters in the company they served.

This was not the only case of corporate conspiracy against vulnerable ‘prey’ that had turned to experts for advice but were ultimately let down, betrayed and left seeking compensation. Consider the examples of forging of signatures, opening of accounts in the name of children without parental authorisation to get kickbacks, charging dead people for services they had no way of ‘using’, charging living people for services that were never delivered, granting of credit to gambling addicted customers, deliberate overriding internal paraplanning advice in order to get commissions, setting receivers onto farmers who were to the point of despair when loan books looked sour, industrial scale document fraud in situations where companies needed to hide evidence of inappropriate advice, and lies told to a corporate regulator about the state of compliance with financial services laws.

This is scratching the surface of the things bankers and advisers have done in the name of self-interest, scoring a profit to please shareholders and to make the bank look like a worthwhile investment for those managing portfolios for institutional investors and superannuation funds.

Pointing fingers

There is a need, however, to address the phenomenon of the mob baying for blood following misconduct by financial services entities.

Sanctions against boards of directors, senior management and staff have been discussed in the media and elsewhere, which is understandable given the impact of the misconduct in both human and financial terms. It is necessary to contemplate with some care the responsibilities of boards of directors, senior management, leaders of business lines and the middle managers involved in these organisations.

Some degree of fact finding is necessary before blame is laid at the feet of a board for the activities of a rogue planner or their immediate supervisor. It is unrealistic to expect that a board of directors would know that there is a rogue planner or teller or adviser somewhere in their system.

It is impossible for a board member to know that one person or several people in a branch in one corner of a country has created their own fiefdom of greed or corruption within the business. Directors should be able to trust the system that is overseen by the management they employ to work prudently and ethically as a general principle. The role of directors should never be confused with that of management and it is foolish to expect that the activities of a rogue staffer seeking to line their own pockets will be known by the board.

Populist calls for the heads of chairmen and directors of boards to be thrown behind bars may be an understandable reaction to one or many transgressions committed by a corporation, but it is hard, cold evidence and not emotion that must drive judicial outcomes. It is the fact patterns that will ultimately determine the parties that are guilty of offences where matters are tried before a court of law.

There will, of course, be times when a director or an entire board will find themselves in a public prosecutor’s cross-hairs for what has occurred within an entity for over which they have responsibility of oversight. Only a fool would suggest otherwise. One thing is certain, however, and that is that shareholders end up paying dearly for the unethical conduct engaged in by those of those working within and managing the entity in which they have an ownership stake.

.. Vulture City (Wilkinson Publishing, $29.99)